Abstract:&nbspWe examine the extent of downward nominal wage rigidity using the
microdata underlying the BLS employment cost index--an extensive,
establishment-based dataset with detailed information on wage and benefit
costs. We find stronger evidence of downward nominal wage rigidity than
did previous studies using panel data on individuals. Firms appear able
to circumvent part, but not all, of this rigidity by varying benefits:
Total compensation displays modestly less rigidity than do wages alone.
Given our estimated amount of rigidity, a simple model predicts that the
disinflation over the 1980s would have raised equilibrium unemployment
notably. This prediction stands in contrast to the actual behavior of
unemployment over this period: The addition of a term capturing the cost
of rigidity (that rises as inflation falls) has no additional explanatory
power in a standard Phillips Curve equation.